The state of Montana has more outstanding water rights than it has water, and it’s taking a toll on the state’s streams and aquifers. Chris Corbin thinks a water bank specifically for mitigation can solve the problem. If his idea works, it’ll be the latest in a series of projects in the West that use water rights markets to remedy environmental problems.

The state of Montana has more outstanding water rights than it has water, and it’s taking a toll on the state’s streams and aquifers. Chris Corbin thinks a water bank specifically for mitigation can solve the problem. If his idea works, it’ll be the latest in a series of projects in the West that use water rights markets to remedy environmental problems.

3 November 2011 | Chris Corbin likes to open his presentations with a news clipping: “Stevensville Man Accused of Shovel Assault.” The article recounts how last June, in a town a few miles south of Corbin’s hometown of Missoula, Montana, a man with a shovel jumped a fence, sprinted across a field, and took a swing at his neighbor’s head. The assailant was apparently angry because the other man had opened the headgate on his irrigation ditch an hour earlier than he was supposed to. The neighbor ended up with a cracked tooth and a black eye.

Welcome, Corbin tells his audience, to the world of water rights.

With water fights like this, it’s no wonder that Montana streams and aquifers have been running low, prompting many areas to order water rights users to mitigate for new withdrawals. Now Corbin, founder of Lotic Water Marketing, and a local ditch company envision a “water bank” that lets people trade their water rights instead of fight over them. If it works, it will provide an alternative revenue stream for agricultural operations feeling pressure from urban growth; it will incentivize greater efficiency of use within the ditch company; and it will help make sure that the upper Clark Fork River and the local aquifer aren’t depleted further.

Water disputes in the West are old news. Across the region, tens of thousands of miles of streams and rivers are chronically or periodically dewatered from over-withdrawal. We’re pumping from our aquifers at an alarming pace: the Oglalla aquifer, which underlies a huge swatch of the Great Plains from South Dakota to Texas, has had its water level drop by over 100 feet in some areas since the 1940s – despite the fact that agricultural operations are, for the most part, much more efficient than they used to be. Coupled with the fast pace of urban growth – the five fastest growing states are all in the West, according to the latest census – water supplies in the region are under tremendous pressure.

Perverse Incentives Under the Law

The water problem has extra traction because the laws governing water rights – which you need if you are going to use more water beyond that used by a normal household – tend to create incentives to use more water than less because they have historically come with a ‘use it or lose it’ caveat: if you don’t use your full allocation, you forfeit your legal claim to it.

Furthermore, environmental uses – like leaving the water instream to protect fish populations – have only very recently begun to be recognized as a legitimate use of the water; and in some states, like Colorado, private parties cannot legally hold instream flow rights. What this all means is that your average water user is not going to be rewarded for making do with less, and thereby leaving the water in the river or aquifer.

Complicating matters even more is the fact that a lot of these rights were issued in the flush years of the early twentieth century. Plentiful rain and roaring rivers were thought to be the norm, and water rights were handed out accordingly.

Now, “the state of Montana has recognized that there are more valid claims to water than there is water available,” says Corbin.

Montana’s response has included legislatively ‘closing’ highly appropriated basins. No new appropriation applications will be accepted in the six currently closed basins. New developments must mitigate for any significant water depletion to streamflows or groundwater levels by purchasing existing rights to restore in-stream flows or recharge groundwater levels.

But buying a water right involves huge transaction costs. Getting approval for a change application transferring ownership usually takes between one and three years, plus a year or two spent preparing the application. A typical change application can be 100 pages long.

Corbin recalls telling one man who called him about buying a water right that he should expect to spend around $1,100 per acre-foot of water, and $10,000 for the change application process.

A Ditch Company Becomes a Mitigation Bank

Missoula, MT is a smallish city in the western part of the state. The city is growing fast: its population has increased by about 20 percent in the last ten years, to around 67,000 currently. But the basin where the city is located is closed to further water appropriations, and any significant new use has to be mitigated.

Corbin thinks he’s found a smarter way to meet demand without degrading the area’s water sources further. He’s been working with a local irrigation company, the Grass Valley French Ditch Company, on a project that would essentially create a mitigation bank for water – a one-stop shop for buyers. Whatever water the company doesn’t need for irrigation could be sold for mitigation and returned to the nearby Clark Fork River, or used for aquifer recharge. Developers with mitigation needs driven by basin closure rules can buy these rights directly and skip the long and expensive application process. If Corbin’s project is approved, it’ll be the first of its kind in Montana.

Making Water Law Work for Mitigation

It’s also a project that wasn’t possible until last month, when House Bill 24 took effect in Montana. It included a short provision that “an appropriator may apply for a change in appropriation right for the purpose of marketing water for aquifer recharge or mitigation.”

In other words, a water rights holder doesn’t need to have a contract with a buyer in place in order to apply for a change in use. It seems like a small detail, but needing to have lined up a buyer in advance is in fact a huge drag on the water rights market at large – and stops sales for environmental purposes dead in their tracks.

“Nobody for mitigation or aquifer recharge is going to have existing contracts in place,” Corbin explains, “because they don’t know where the demand’s going to come from.”

HB 24 is part of a larger effort in Montana to create a legal framework that is friendly to mitigation. “The permitting system needs to work for everyone,” says Laura Ziemer, Director of Trout Unlimited’s Montana Water Project, which was a major backer of the bill. “We see HB 24 as removing some of the existing legal and regulatory barriers for the folks who are interested in providing mitigation.”

For Agriculture Feeling the Pinch, A Possible New Source of Revenue

The Grass Valley French Ditch company (GVFDC) is located about ten miles west of Missoula, in an area that’s seen a lot of recent growth. Some of its lands have already been developed and the water shares turned back to the company.

“The ditch company has 80 percent of their shareholders paying for 100 percent of their operation and maintenance,” says Corbin. “As an asset-holder and a manager of these water rights, this company is saying, ‘What can we do in this changing landscape to maintain our livelihood?’”

The answer they’ve hit on – creating a bank of water shares to be sold for mitigation – will require the ditch company’s converting all of its shares to marketable rights, and initially selling the 20 percent currently going unused. Proceeds will be reinvested in the company for maintenance and more efficient irrigation infrastructure.

To date Corbin and the GVFDC have filed a change application and are waiting to see what the regulatory authorities make of the project. They think their chances of approval are good, but plenty of work remains before the project can actually starting marketing water for mitigation.

How Much is Mitigation Water Worth?

Corbin’s not sure how much the rights will ultimately sell for, but he knows it will be more than the current average of roughly $1,100 an acre-foot and less than current cost of transferring ownership.

“If you do this on your own, and don’t buy from this bank, you’re looking at a $10,000 change application then three years to go through the regulatory process,” he says. “So there should be a premium price, because we already fought those battles, are taking all of the risk, and now have this banked position. We’re going to build the transaction costs into the price of the water.”

He expects to have plenty of takers.

“Time is money for developers, too,” he says. “If they’re getting their subdivision plotted, and they’re going through the regulatory process and then their water right’s holding up the final approval for three years – that’s a bad thing.”

But is it Scalable?

It helps that downstream is the Noxon Rapids dam and reservoir, which the ditch company expects to be the major driver for mitigation on the stream reach. The presence of that reservoir means it’s much easier to demonstrate that mitigation is adequate – something Corbin readily admits won’t always be the case.

“The model will work in other locations, but it won’t be as widespread,” he says. “90 miles downstream there’s not going to be this dam that has year-round storage.”

Showing that mitigation is physically going to work is just one hurdle. “Each regional office is different, and going through the regulatory process is a big component of this,” he adds. “The personalities are different. The interpretation of the rules can be different. This isn’t a CostCo, where you can pick it up and put in down in the next community and the next community.”

The Fish Factor

The project’s location may be doubly blessed. As Norman Maclean wrote in his novella A River Runs Through It, growing up as a boy in Missoula “there was no clear line between religion and fly fishing.”

In western Montana, most people are pretty nuts about fly fishing. The outdoor recreation tourism industry is a big part of the local economy. Trout, upon which all this depends, disappear quickly from dewatered streams. These circumstances make it a lot easier to sell to the general population the case for restoring river and stream flows. This is another thing, Corbin concedes, that won’t be the case everywhere.

One Market, Many Models

But with basin closure and water scarcity worries a growing trend, Corbin’s new project is just one of a crowd of new mechanisms being tested that use the water market to achieve environmental goals.

All over the West, state and private trusts are experimenting with using the water market to meet environmental goals. A recent report by the Property & Environment Research Center estimates that a half-billion dollars’ or ten billion acre-feet worth of water was reallocated to instream use between 1987 and 2007.

There may even be scope for linking the mitigation water market to other environmental markets.

“Wetlands are incredible infiltration galleries,” Corbin points out. “Something like 97 percent of a wetland is aquifer recharge. Why design and build infiltration infrastructure like strip pits when you could sell wetland credits on the surface and aquifer recharge credits below the surface?”

The pressure that the Grass Valley French Ditch Company and operations like it are feeling could turn out to be an opportunity in disguise – both for the agricultural and environmental communities.

“Historic irrigation institutions are looking at a landscape that has changed,” says Corbin. “There’s an opportunity for them to still be water managers, but use green infrastructure and other techniques to manage water for all uses, and not just irrigation.”

Additional resources

Genevieve Bennett is the Water Markets Intern at Ecosystem Marketplace. She can be reached at gbennett@ecosystemmarketplace.com. Please see our Reprint Guidelines for details on republishing our articles.